A new home is a significant asset. Buying one is a substantial investment; you need to know how to protect it while protecting your loved ones.
As a new homeowner, you must consider how your family will keep up with mortgage payments should something happen to you. You need to ensure your family continues to live in the home without taking on the mortgage payment burden.
When you buy a new home, your lender will try to sell you mortgage insurance to eliminate the outstanding balance of your mortgage if you die. While there’s nothing wrong with this, personal life insurance does the same thing and even more.
Understanding the difference between mortgage insurance vs life insurance will help you select the best policy. Before you make a choice, take a look at this blog post on mortgage insurance vs life insurance.
Mortgage Insurance Vs Life Insurance
Mortgage insurance is an insurance policy, offered by banks and financial institutions, that pays off the balance of your mortgage payment should something happen to you.
A mortgage life insurance or mortgage protection insurance requires a fixed premium payment to cover the reducing mortgage debt till the mortgage balance is paid off. The cost is added to your monthly mortgage payment.
With mortgage insurance, your family does not have to worry about paying off mortgage debt, selling, or forfeiting your home. It is easier to qualify for mortgage insurance.
However, life insurance is an insurance policy, offered by insurance companies in Canada, that pays a death benefit to your designated beneficiary if you die while covered by the policy. Unlike mortgage insurance, the policyholder owns the policy and not the lender. Also, the proceeds from the policy can be used by the beneficiary for whatever they want.
Life insurance can be bought without regard for the length of your mortgage and would not end when your mortgage is paid off. Your policy isn’t linked to your mortgage and can be moved around when you want to.
Your life insurance policy coverage doesn’t decline, unlike mortgage insurance. You can adjust your life insurance policy to fit life changes.
6 Reasons Why Life Insurance Is Better Than Mortgage Insurance
There are a few differences between mortgage insurance and life insurance. Indeed, there are some advantages to mortgage insurance, but you can’t compare them to the benefits of life insurance.
Let’s look at some advantages of life insurance over mortgage insurance.
1. Life Insurance Offers Flexibility
If something happens to you, your spouse and children will face many troubles. Paying off the mortgage may not be at the top of this list.
With mortgage insurance, your family would have no choice on how the policy proceeds are spent. Life insurance gives your beneficiaries the flexibility to make the best use of your death benefit. They can use the money for college education or pay off other pressing debts.
People are not static, and their needs can change as the years go by. Life insurance gives your family conversion options for more flexibility, unlike singular static policies like mortgage insurance.
2. Life Insurance Lets You Choose Your Beneficiary
Mortgage insurance isn’t designed to protect your family. Instead, it is designed to ensure that your lender receives their money. Your family benefitting from your mortgage insurance policy is only a secondary purpose.
Your lender is the automatic beneficiary of your mortgage insurance. You insure your lender’s risk when buying a mortgage insurance policy.
However, life insurance pays out your death benefit to the beneficiary of your choice. It serves as financial security to protect them when you are no longer around.
If your spouse is the beneficiary of your life insurance policy, they can use the proceed of your policy to maintain the quality of living after you die. This may also include mortgage payments but doesn’t stop there.
3. Life Insurance Offers A Consistent Payout
With mortgage insurance, your coverage amount declines as you pay down your mortgage debt. The benefit you would receive declines with every mortgage payment you make.
Over time, your payout will reduce to a minimal amount, but you will still pay the same premiums. And when you pay off your mortgage payments, your mortgage insurance ends.
However, with life insurance, this is not the case. Your coverage amount remains the same all through the length of your policy.
4. Life Insurance Is Portable
Suppose you want to sell your current home and buy a new one, refinance your home, or renew your mortgage with your existing lender. In that case, you would need to buy new mortgage insurance policies.
Mortgage insurance does not move or port along with your mortgage. Only life insurance can do this.
Mortgage insurance doesn’t go with you if you change mortgage providers. You must prove your health is good enough anytime you move your mortgage to another bank.
Life insurance stays with you throughout your life’s changes. It stays with you even if you decide to move your mortgage to another company. You don’t need to re-apply to get insured. You don’t have to undergo another medical exam to prove your health is good enough to insure.
Applying for mortgage insurance is usually simpler than applying for life insurance. However, this simplicity ends up increasing the cost of insurance.
Premiums for mortgage insurance offered by banks are higher than term life insurance premiums. The premiums usually increase with age.
With life insurance, the insurance company puts in much work to ascertain the insured’s risk and can give a more accurate and lower premium. Mortgage insurance doesn’t do much underwriting during the insurance process, and you have to pay for the assumed risk.
6. Life Insurance Offers Guaranteed Coverage
Life insurance companies guarantee your coverage throughout the length of your insurance policy. Regardless of any changes in your health or lifestyle, your coverage is guaranteed once your policy is approved.
However, mortgage insurance does not guarantee the term of your loan. Any adverse changes in your health can cause your lender to deny your coverage. Your lender can decline your coverage if they discover that your health isn’t in line with their expectations.
The Cost Of Mortgage Insurance Vs Life Insurance
In Canada, the cost of an average term life insurance policy of $500,000 coverage amount for a 30-year-old is $30.39 per month.
However, a person of the same age who opts for mortgage insurance for the same amount will likely pay about $50 for monthly premiums.
When comparing mortgage life insurance vs term life insurance, term life insurance is cheaper and more flexible.
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Final Thoughts on Mortgage Insurance Vs Life Insurance
When it comes to mortgage insurance vs life insurance, picking the right policy can be challenging.
There is a lot of information on why life insurance may be better than mortgage insurance, but the decision is yours to make.
You can speak to an experienced insurance advisor to discuss your family, financial and personal goals and see which products fit you.
Don’t hesitate to reach out should you have any questions.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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